Federal Bank Ltd. v. Deputy Commissioner of Income Tax, Circle-1, Aluva; Commissioner of Income Tax, Central Revenue Building, I.S. Press Road, Cochin (ITA Nos. 36 of 2011 and 78 of 2011)

**IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR.JUSTICE V.G.ARUN** **WEDNESDAY,THE 27TH DAY OF MARCH 2019 / 6TH CHAITHRA, 1941** ## **ITA.No. 36 of 2011** **AGAINST THE ORDER IN ITA 710/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 17-09-2010** ## **APPELLANT/S:** **THE FEDERAL BANK LTD., FEDERAL TOWERS, ALUVA.** **BY ADVS. SRI.V.ABRAHAM MARKOS SRI.BINU MATHEW SRI.B.J.JOHN PRAKASH SRI.MATHEWS K.UTHUPPACHAN SRI.TERRY V.JAMES SRI.TOM THOMAS (KAKKUZHIYIL)** ## **RESPONDENT/S:** **1 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, ALUVA. 2 COMMISSIONER OF INCOME TAX, CENTRAL REVENUE BUILDING, I.S.PRESS ROAD, COCHIN- 682018. (THE CAUSE TITLE IS AMENDED BY SUBSTITUTING THE NAME OF THE RESPONDENT AS PER ORDER DATED 03.06.2011 IN I.A.NO.789 OF 2011).** **BY ADVS. SRI.JOSE JOSEPH, SC, FOR INCOME TAX SRI.P.K.R.MENON SR.COUNSEL GOITAXES SRI JOSEPH MARKOS, SR COUNSEL, SRI MATHEWS K. UTHUPPACHAN,** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 27.03.2019, ALONG WITH ITA.78/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **ITA.Nos. 36 and 78 of 2011** # **2 IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR.JUSTICE V.G.ARUN** **WEDNESDAY,THE 27TH DAY OF MARCH 2019 / 6TH CHAITHRA, 1941** ## **ITA.No. 78 of 2011** **AGAINST THE ORDER IN ITA 718/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 17-09-2010** ## **APPELLANT/S:** **THE FEDERAL BANK, FEDERAL TOWERS, ALUVA.** **BY ADVS. SRI.V.ABRAHAM MARKOS SRI.BINU MATHEW SRI.B.J.JOHN PRAKASH SRI.MATHEWS K.UTHUPPACHAN SRI.TERRY V.JAMES SRI.TOM THOMAS (KAKKUZHIYIL)** ## **RESPONDENT/S:** **THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, ALUVA.** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 27.03.2019, ALONG WITH ITA.36/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **ITA.Nos. 36 and 78 of 2011** **3** ## **JUDGMENT** ## **[ ITA 36/2011, ITA.78/2011 ]** ## **K.Vinod Chandran, J.** The appeals arise from the assessment year 2006-07 and raises question of law from the common order of the Tribunal, which disposed of the assessee's appeal and the revenue's appeal. The questions of law raised are as follows: 1. Whether on the facts and in the circumstances of the case the Appellant is entitled to deduction of the bad debts written off relating to urban branches in full and bad debts written off relating to rural branches to which clause (viia) applies to the extent of the amount by which such debt or part thereof exceeds the credit balance in provision for bad & doubtful debts made in respect of such debt under Section 36(1)(viia). **ITA.Nos. 36 and 78 of 2011** **4** 2. Whether there were any material on record to justify the finding that the Appellant is not a 'financial corporation' entitled to deduction under Section 36(1) (vii) of the Income Tax Act? 3. Whether on the facts and in the circumstances of the case the ITAT erred in confirming the disallowance of Rs.6,20,85,000/- out of the Appellant's claim under Section 10(23G) on the ground that the approval for three of the entities is not available for the relevant assessment year when the entities were approved under the above Section for earlier assessment years and their application for extension of the approval is pending before the CBDT. 4. Whether on the facts and in the circumstances of the case the loss on revaluation of the trading stock of interest rate swaps (IRS) on market to market basis (i.e cost or maker price **ITA.Nos. 36 and 78 of 2011** **5** whichever is lower) is allowable as a deduction. ## 5. Whether on the facts and in the circumstances of the case and in the absence of any express provision to the contrary the Appellate Tribunal is right in holding that sub-sections (2) and (3) of Section 14A are retrospective in nature? 6. “Whether on the facts and circumstances of the case, the deduction to be allowed under Section 36(1)(vii) should be calculated taking into consideration the write off of bad debts with respect to certain branches, for which in earlier years the claim for deduction of Provision for Doubtful Debts was disallowed on the ground that the said branches are not rural branches as covered by Section 36(1)(viia) and the amount of Provision of Doubtful Debts reduced from the Loans and Advances /Debtors on the **ITA.Nos. 36 and 78 of 2011** **6** asset aside of the Balance Sheet as held by the Hon'ble Supreme Court in Vijaya Bank's case in 323 ITR 166”. 2. The first question arises, insofar as the provision for bad debts written off. The Tribunal has remanded the matter, directing the Assessing Officer to re-consider the issue based on the Full Bench decision of this Court in _**Commissioner of Income Tax v. South Indian Bank Ltd. [(2010) 326 ITR 174(Ker)(FB)]**_ . As of now, the Full Bench decision has been overruled by the Hon'ble Supreme Court and the decision reported in _**Catholic Syrian Bank Ltd.**_ v. _**Commissioner of Income Tax, Thrissur**_ _**[(2012) 3 SCC 784]**_ holds the field. Hence, the Assessing Officer would consider the issue based on the aforesaid judgment. 3. The Assessing Officer shall verify the computation, looking into whether there is any allowance granted for provision of bad debts in non-rural branches for the previous years. **ITA.Nos. 36 and 78 of 2011** **7** In which event alone, the allowance of written off bad debts in non-rural branches will be confined to the excess allowed from the provision made and deduction allowed for non- rural branches. We make it clear that in making the computation, there can be no consideration of the provision for bad debts for rural branches as granted under sub-clause (viia) of Section 36. 4. The second question is covered by a decision of this Court in the _**Federal Bank**_ _**Limited**_ v. _**Assistant Commissioner of Income**_ _**Tax [(2011) 240 CTR (Ker) 320]**_ . Hence the question is answered against the assessee and in favour of the revenue. 5. On question No.3, the disallowance was made, since there was no substantiating certificates produced by the assessee. As of now, the learned Senior Counsel submits that the assessee has obtained the certificates and **ITA.Nos. 36 and 78 of 2011** **8** will produce it before the Assessing Officer. Since on question No.1, there has already been a remand made, it is only proper that the Assessing Officer considers the certificates produced by the assessee and grant allowance to the extent the claim is substantiated. 6. The fourth question is related to the revaluation of Interest Rates Swaps (IRS), which refers to interest rates fluctuations in the market. The lower authorities have taken a view that it is only a notional revaluation and there can be no deduction allowed for the same. We confirm the order of the lower authorities and answer the question against the assessee and in favour of the revenue. 7. The fifth question is covered against the revenue and in favour of the assessee in _**C.I.T.**_ v. _**Essar Teleholdings Pvt.Ltd. [(2018)**_ _**401 ITR 445 (SC)]**_ . It has been held by the Hon'ble Supreme Court that the machinery **ITA.Nos. 36 and 78 of 2011** **9** provision for giving effect to Section 14A of the Income Tax Act came into effect only from the assessment year 2008-09. Hence, there can be no application of Section 14A to the subject year. The question is answered against the revenue and in favour of the assessee. 8. In considering the last question, we have to look at the assessment order itself. In the present year, the assessee had claimed deduction under Section 36(1)(viia) of the Act at Rs.97,03,05,677/-, which was stated to be provision for bad and doubtful debts for rural branches. As the provision existed then, under sub-clause (viia) of Section 36(1) of the Act, deduction allowable was up to 7.5% of the total income before deduction of this provision and deduction under Chapter VIA and 10% of the aggregate advances of rural branches. There is no dispute with respect to the limit of 7.5% on total income, which was **ITA.Nos. 36 and 78 of 2011** **10** computed at Rs.42,03,65,222/-. However, there is considerable difference in the 10% limit of aggregate advances as computed by the Assessing Officer. 9. The total aggregate advances of rural branches as claimed by the assessee was Rs.1341,35,01,706/-. The assessee had made such a claim on the contention that the population of the locality, in which the branch was situated has to be related to the smaller unit of desam/kara. The Assessing Officer however, refused to take such determination and found that the Panchayath area has to be taken. As of now, the Division Bench of this Court in _**C.I.T.**_ v. _**Lord Krishna Bank Ltd. [(2011) 339 ITR 606 (Ker)**_ has held that the determination of non-rural branches shall be only with reference to the revenue villages and not solely on the basis of population in an area as demarcated by the **ITA.Nos. 36 and 78 of 2011** **11** assessee Bank. The Assessing Officer hence rightly computed 10% of aggregate advances at Rs.3,27,15,858/-. Thus, a total amount of Rs.45,30,81,080/- was arrived at; eligible for deduction. The provision created being Rs.97,03,05,677/-. There was a disallowance of Rs.51,72,24,597/-, which was added back as income. 10. The specific contention raised by the learned Senior Counsel for the assessee Bank is that, in fact, the assessee had written off the said amounts and hence there could be a deduction claimed under Section 36(1)(vii) itself. For the above proposition, the learned Senior Counsel relies on _**Vijaya Bank**_ v. _**Commissioner of Income-Tax and Another**_ _**[(2010) 323 ITR 166(SC)].**_ Therein the distinction between a write off and provision for bad debts was specifically noticed. The Hon'ble Supreme Court referred to _**Southern**_ **ITA.Nos. 36 and 78 of 2011** **12** _**Technologies Ltd.**_ v. _**Joint CIT [(2010) 320 ITR**_ _**577 (SC)]**_ to emphasise the distinction between a write off and a provision for bad debts, which is as follows: “…... To understand the above dischotomy, one must understand 'how to write off'. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor's account, it would constitute a write off of an actual debt. However, if an assessee debits 'provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the 'current liabilities and provisions' on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after April 1, 1989.” 11. However, therein, there was a separate procedure applied, which also found favour with the Hon'ble Supreme Court as an eligible write off. The facts in that case were stated to be so:- **ITA.Nos. 36 and 78 of 2011** **13** …...However, as stated by the Tribunal, in the present case, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee-bank had correspondingly/ simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance-sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the balancesheet was shown as net of the provision “for the impugned bad debt”........ 12. The procedure as prescribed therein would also be a write off. It is the contention of the assessee Bank that the assessee had actually written off the amounts as has been found in _**Vijaya Bank**_ (supra). In such circumstances, it is only proper that the Assessing Officer verify the Balance Sheet of the assessee, produced for the year and decide the question of deduction under Section 36(1)(vii)of the Act, in consonance with _**Vijaya Bank**_ (supra) and the declaration **ITA.Nos. 36 and 78 of 2011** **14** made therein. The income tax appeals are partly allowed. Parties to suffer their respective costs. Sd/- **K.VINOD CHANDRAN JUDGE** Sd/- **V.G.ARUN JUDGE** **==> picture [67 x 8] intentionally omitted <==** **----- Start of picture text -----**<br> SB/29/03/2019<br>**----- End of picture text -----**<br> **ITA.Nos. 36 and 78 of 2011** **15** ## **APPENDIX OF ITA 36/2011** ## **PETITIONER'S/S EXHIBITS:** **ANNEXURE A TRUE COPY OF ASSESSMENT ORDER DATED 29.11.2007. ANNEXURE B TRUE COPY OF APPELLATE ORDER DATED 27.03.2008 OF THE COMMISSIONER. ANNEXURE C TRUE COPY OF APPEAL FILED BY THE APPELLATE IN MAY 2008 BEFORE THE APPELLATE TRIBUNAL.** **ANNEXURE D THE COPY OF APPEAL DATED 06.06.2008 FILED BY THE DEPARTMENT BEFORE THE APPELLATE TRIBUNAL. ANNEXURE E CERTIFIED COPY OF IMPUGNED COMMON ORDER DATED 17.09.2008 OF THE APPELLATE TRIBUNAL.** **RESPONDENTS EXTS: NIL** **// TRUE COPY //** **P.A TO JUDGE**